JPMorgan’s ‘London Whale’ Loss Rises to $3 Billion as Lawsuits Fly

Days after disclosing a massive derivatives trading loss, JPMorgan Chase was hit with three shareholder lawsuits accusing company executives — and its CEO Jamie Dimon — of misleading investors about the extent of the blunder. The flurry of legal paper came as news emerged that the losses at the nation’s largest bank have grown by 50% to $3 billion — just days after the debacle was disclosed. Now that JPMorgan’s bad position is known, hedge funds have been betting against it, driving up the bank’s losses and raising questions about how it intends to extricate itself.

The three lawsuits are the first of what could be a flurry of legal actions against the bank over the botched trade, which has wiped out nearly $20 billion in JPMorgan shareholder equity and renewed calls for more aggressive regulation of Wall Street. One of the complaints, filed in New York federal court on behalf of investment firm Saratoga Advantage Trust, a JPMorgan shareholder, alleges that bank executives misled investors into thinking that its traders were pursuing deals designed to reduce risk, when in fact they were geared to producing profits.

“Defendants issued materially false and misleading statements regarding the losses and risk of loss to the Company arising from massive bets on derivative contracts related to credit indexes reflecting interest rates on corporate bonds,” the complaint charges. “These derivative bets went horribly wrong, resulting in billions of dollars in lost capital for the Company and billions more in lost market capitalization for JPMorgan shareholders.

Last Thursday, JPMorgan’s CEO Dimon said the firm’s in-house investment office had lost $2 billion on a portfolio of complex financial derivatives initially designed as a “hedge” to balance out potential losses elsewhere on the bank’s books. Dimon said the bank could face $1 billion in further losses by the end of the year. But in only a matter of days, the position has worsened, costing the bank an additional $1 billion in losses, according to The New York Times. Several hedge funds now betting against the bank know its position is compromised and are smelling blood.“They were caught short,” the paper quotes one credit trader as saying. “This is a very hard trade to get out of because it’s so big.”

Meanwhile, FBI Director Robert Mueller confirmed on Wednesday that the feds have launched an initial probe into JPMorgan’s bungled trade.” The Securities and Exchange Commission is also examining the matter. Financial reform advocates have seized the incident as proof that stronger bank regulation is needed. Dimon has been Wall Street’s most vocal opponent of the Volcker Rule, a central part of the Dodd-Frank financial package aimed at preventing banks that can collect government-insured deposits from making risky, so-called “proprietary” bets.

Another of the complaints refers to the JPMorgan unit that made the bad bet — the bank’s “chief investment office” — which Dimon had pushed to transform in recent years from a conservative operation designed to mitigate the firm’s overall risk, into a risk-taking profit center. The complaint alleges that JPMorgan executives didn’t properly disclose the true nature of the chief investment office.

“What the Company did not reveal was that those losses were the result of a marked shift in the company’s allowable risk model, undisclosed to investors, and the similarly clandestine conversion of a unit within the company that was touted as providing a conservative risk-reduction function into a risky, short-term trading enterprise that exposed the company to large losses instead,” said another of the complaints, cited by Reuters, which was filed by a California shareholder against Dimon, Chief Financial Officer Douglas Braunstein and board members.

Thanks to vigorous lobbying by JPMorgan and other Wall Street banks, the Volcker Rule includes a loophole that allows the banks to make “hedge” trades, designed to reduce risk. But JPMorgan traders were going much further than hedging, and in fact, Dimon himself had pushed to transform the chief investment office into a money-making operation. The mysterious trader at the center of the scandal, Bruno Iksil, “the London Whale,” has been removed from the trading desk and is expected the leave the bank.